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Archives for October 2013

Exculpatory and limitation of damages provisions are staples of commercial transactions; especially in the service contract setting. The former shields a contracting party from all liability (“if something goes wrong, I’m not responsible”), while the latter caps a party’s monetary damages (“if something goes wrong, my maximum liability is $100”).

For decades, cases across the land have grappled with the validity and enforceability of these contract terms. Generally, whether a given disclaimer is upheld comes down to a fact-specific analysis of the terms’ prominence and text size (can you find it?) along with the nuances of the parties’ relationship. (is a dominant person taking advantage of a more vulnerable person?)

Exculpatory Provisions

Illinois favors freedom of contract and exculpatory provisions are generally enforceable unless (1) it’s against public policy to do so or (2) there is something in the social relationship of the parties which weighs against enforcing the term.

Exculpatory terms are not favored and must be strictly construed against the benefitting party, especially where that party drafted the contract.

An exculpatory clause violates public policy where (1) the contract involves an employer-employee relationship, (2) is between the public and those charged with a public duty (i.e. a common carrier or utility), or (3) there is a disparity in bargaining power between the parties so that freedom of choice is lacking.

Courts also look at whether Disclaimers are unconscionable. Procedural unconscionability applies where the disclaimer is hard to find, buried or hidden.

A contract term is substantively unconscionable where it’s blatantly one-sided and completely favors one party at the expense of the other.

Illinois’ Construction Contract Indemnification for Negligence Act, 740 ILCS 35/1 posits that agreements to indemnify against a contractor’s negligence are void as against public policy.

Illinois Disclaimer rules glaringly reflect the importance of pre-contract negotiation. Parties are free to allocate risks as they see fit and where they are both sophisticated commercial entities, freedom of contract rules prevail and exculpatory clauses will be upheld – save for any public policy reasons against their enforcement.

In Tamburo v. Dworkin, 2013 WL 5408540 (N.D.Ill. 2013), an Internet libel case, the Illinois Northern District examined the nature and reach of the qualified privilege and truth defenses to defamation claims filed by a software company against a defendant that made disparaging comments about the company on web message boards.

Facts: Defendant, a professional dog breeder, created a website that provided free canine pedigree information to the dog-breeding community. Plaintiffs created a Data Mining Robot that “harvested” defendant’s site data, packaged it and sold it to the public. Defendant, irate that plaintiffs took defendant’s dog data without permission, accused plaintiffs of stealing the pedigree information. Plaintiffs sued for defamation and tortious interference with contract and prospective economic advantage. Defendant moved to dismiss all counts of the complaint.

The plaintiffs alleged that defendant’s venomous posts caused plaintiffs to fall into disrepute in the business community. An Illinois defamation plaintiff must allege (1) a false statement about the plaintiff, (2) published to a third party, (3) that causes damage to the plaintiff. *8.

If its defamation per se (imputing commission of crime, infection with a loathsome disease, incompetence or lack of integrity in employment, adultery or fornication), the plaintiff doesn’t have to show special damages. Common defamation defenses include truth, that the statement is capable of an innocent construction, the statement is an opinion (not factual), and the challenged statement is “rhetorical hyperbole.” *8.

Qualified Privilege Defense

Another defamation defense is the qualified privilege defense. This applies where a statement implicates a legitimate interest of the speaker/publisher or an interest of the recipient of the statement/publication. A prototypical example is a false statement that involves matters of important public concern.

To defeat a qualified privilege defense, the defamation plaintiff must show (a) the statement was false; and (b) the defendant abused the privilege by intentionally publishing the falsehood or by displaying a “reckless disregard” concerning the statement’s truth or falsity. Reckless disregard means the defendant “entertained serious doubts” about the truth of the statement yet failed to properly investigate its truth. *11.

The court held that defendant’s statements that plaintiffs’ principal was unethical and deceitful, while defamatory per se, were still non-actionable statements of opinion protected by the First Amendment. In addition, defendant’s statements that plaintiffs stole (committed “theft”) defendant’s data and was engaged in “hacking” were substantially true: plaintiffs’ web trolling Robot did swipe data from defendant’s website without permission and later sold it for a profit. *9,

The defendant also had a legitimate interest in protecting her time investment in compiling the pedigree information and there was a public interest in protecting private information from unconsented Web harvesting. The Court also found that plaintiffs produced no evidence that defendant abused the qualified privilege by making the theft accusations recklessly or indiscriminately publishing them to unnecessary recipients. *10, 13.

Finally, the Court found that defendant’s statement that the plaintiffs “took” defendant’s data and was “holding it hostage” were not actionable since the former statement was reasonably susceptible to an innocent construction (defendant didn’t literally mean that plaintiff removed the information from defendant’s site) and the latter “held hostage” statement was pure rhetorical hyperbole. *15-16.

Case Lessons: It’s hard to prove defamation. A defamation defendant has a varied arsenal of defenses including truth, innocent construction, opinion vs. fact and rhetorical hyperbole, among others. The qualified privilege defense will apply where a defendant can show that he has a legitimate interest in the subject matter of the statement or if the statement implicates an important public policy interest. In Tamburo, there an undercurrent (my interpretation) of the Court viewing plaintiffs’ practices as unfair: swiping or “scraping” the fruits of defendant’s labor (information compiled over a five-year period and provided free of charge to the pubic) and then trying to profit from it.

The parties entered into a contract to purchase the office building for a cool $124M. The plaintiff – the buyer’s assignee – deposited $6M in earnest money. When the world credit markets froze, plaintiff wasn’t able to get financing and couldn’t consummate the purchase.

The seller then terminated the contract and retained the buyer’s $6M earnest money. Plaintiff sued to rescind the contract and for return of its $6M earnest money deposit claiming that the world financial crisis made it impossible for it to go forward with the building’s purchase. The Court dismissed plaintiff’s complaint on defendant’s motion. The First District affirmed.

Rules/reasoning

The basis for the plaintiff’s rescission claim was contractual impossibility: that the world credit crisis made it impossible for the plaintiff to obtain the necessary financing to buy the building.

In Illinois, theimpossibility of performance doctrine applies where the purposes for which a contract was made have become impossible for one side to perform. Impossibility excuses contractual performance where performance is “objectively impossible” due to the contract subject’s destruction or by operation of law.

But where a contingency that causes the impossibility could have been anticipated and guarded against, impossibility won’t excuse performance. The party asserting impossibility must show that events or circumstances making performance impossible were not reasonably foreseeable at the time of contracting and the defense won’t apply where the event creating impossibility lies within the promisor’s power to remove the obstacle to performance. *6-7.

Here, the First District sided with the defendant and held that even if the credit crunch did make it impossible for the plaintiff to buy the building, its inability to get financing could have been anticipated and provided for in the contract.

The Court noted that an inability to secure financing is pretty much always a risk in any contract setting and that if the court allowed failed financing to excuse performance, it would completely undercut contract law. *7.

The Court also pointed to the plaintiff’s financial largesse in rejecting the impossibility argument; the plaintiff’s $1.6 billion in assets showed that it had the power to remove any obstacles to performance selling off some of its assets and paying the $124M purchase price for the building. *8

Take-aways:

Not even a cataclysmic, world-wide financial disaster qualified for the impossibility defense. There’s actually more to it than that but YPI definitely shows that the impossibility of performance defense (or offense) can be a tough sell and is sparingly applied in Illinois contract litigation.

The case also cautions parties to take pains to allocate risks and provide for obstacles to performance during the contract formation phase. YPI also seems to suggest that if a party claiming impossibility has the financial resources to remove the obstacle preventing performance, an impossibility of performance argument may fail.